Wednesday, July 20, 2011

800 Words: Broken China

It’s November 2008. The global economic slowdown is clearly becoming a crisis. Yet Hu Jintao is on CNBC, announcing that China is still growing on the same schedule. The world slows down, but Chinese production never stops. Meanwhile, a story is buried on the back page of every business section that that a Chinese agency reports a decrease in energy consumption. Around the same time, China announces - much more quietly - a 4 trillion yuan ($602.27 billion) stimulus. It just doesn’t add up, but if China doctors its economic numbers, how would we ever know?

Twenty-five years ago, it was taken for granted that the twenty-first century belonged to Japan. Fifteen years ago, it was taken for granted that the next century would belong to the EU. Now it’s allegedly China. In both of the previous cases, production seemed to grow exponentially...until it stopped. How could the economies of such productive, industrious world powers suddenly screech to a halt?

Because the economies of Japan and the EU are fundamentally different than the US, and we in the US never accounted for those differences when we took their eminence for granted. The United States’s prosperity is based (at least until this recession) on an economy ruled by startups and dynamic renewal, in which any company can soar or crash at any moment. Traditionally, if a US company has outlived its usefulness, it will fail and a smarter company with a (hopefully) better product will take its place. But this kind of renewal is virtually impossible in countries where a few conglomerates can control everything that is made. If somebody made a better product than Sony or Toyota, the biggest Japanese companies could simply buy the rights to it, or crush it in the marketplace (remember Betamax?).

China’s economy is, in a sense, even less dynamic. No matter how many startups come out of China, they are all still subject to the whims of the government’s Central Committee. When a new city springs up, it’s not because of a burgeoning startup or industry. It’s because the government commands thousands of engineers and workers to build it.

A large part of how China’s economy grew so smoothly was the government’s one-child policy. Since 1979, the Chinese population has only grown 0.5% (India grew 13% in the same period). When population numbers stay constant, it becomes much easier to raise the standard of living because the government knows precisely for how many people it must plan. But after a certain point, it is inevitable that the one-child-policy will outlive its usefulness. Once the average Chinese person attains a certain degree of wealth, two options are possible.

1. The better availability of birth control will shrink Chinese birth-rates in the manner of most other first-world countries. In such a scenario, the young generation would be faced with the burden of providing for a far more populous older generation.
2. The Chinese people will demand an end to the one-child policy and have enough wealth to effectively oppose the government. If this happens, the Chinese government will have to provide jobs for many more people in the coming generations.

The Chinese Government knows that it will soon face a reckoning from which there is no easy escape. If the standard of living goes down, the people will demand change. If the standard of living goes up, the people will demand change. The only potential way out of this conundrum was to find a “sucker” country who could pump money into the Chinese economy by spending all of their own.

Even at its weakest, the American dollar was always the best hope to improve the Chinese standard of living. The Central Committee instructed their banks to buy up as many American bonds as they could fit in their vaults. As America continued spending as though there was no limit to their credit, the Chinese bought as much American credit as they could find. As a result, Americans now own Chinese products, and the Chinese own American money. The problem is that the Chinese economy still doesn’t have enough money to let its citizens live well, nor can they spend whatever money they have. Because if America’s credit runs out, it’s China who owns most of it. They will have to help the United States pay its debts, which now total almost 14.3 trillion dollars.

The wealth created by China is not created by private speculators. Chinese wealth is created by its government, who may instruct their investors to buy whatever the government deems necessary at any time. To this day, the result of the government’s efforts is that the average Chinese income is now roughly $4500 a year - still only one-half of the per-capita income of the poorest first-world country. At the same time, China is attempting to ease itself out of American bonds, but what will replace it? The Chinese economy is based on a weak currency that allows other countries to hire Chinese workers cheaply. But if China wants to raise the standard of living, they have to find a way to strengthen their currency. This cannot happen without buying still more credit from other countries.

In thirty years, China has never had a recession. Perhaps this is good news, but probably not. We simply don’t know what would happen when China experiences one. In a Western Democracy, you can vote out a government. In the Chinese autocracy, you must either submit to the will of the rulers, or plan a revolution. The Soviet Union lasted 72 years. The People’s Republic of China is now ten years younger than that. Like the late-USSR, the Chinese government is a gerontocracy - full of wrinkled bureaucrats determined to retain power without resorting to the Totalitarianism of their youths. One of the results is that each province is run by a regional governor like a fiefdom. China has a long history of devolving into regional warfare when the central ruler is too weak.